MC Explains | All there is to know about liquidity facility for standalone primary dealers

RBI

The Reserve Bank of India will offer an additional Rs 5,000 crore to standalone primary dealers under the Standing Liquidity Facility on March 31. This will be provided at 6.50 percent, the prevailing repo rate.

Here is an explainer:

MC Explains

The Standing Liquidity Facility is a window through which the RBI lends money to standalone primary dealers at the repo rate.

A primary dealer is an RBI-registered entity that is authorised to buy and sell government securities. There are two types of primary dealers in India – standalone primary dealers and bank primary dealers.

Standalone primary dealers are either subsidiaries of scheduled commercial banks or entities incorporated abroad or those incorporated under the Companies Act and registered as non-banking financial companies.

According to the RBI, the borrowed amount has to be repaid on or before April 5, 2023.

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According to the dealers, the additional funds are being provided to facilitate their role in state loan, bond and treasury bill auctions amid tighter liquidity conditions.

The RBI said the decision was taken after a review of current and evolving liquidity conditions.

At the end of the quarter, there is tighter liquidity in the market. Primary dealers play an important role in the state loan, bond, and treasury bill auctions and hence require liquidity support in tight conditions, said Ajay Manglunia, managing director at JM Financial.

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This facility is significant now because liquidity in the banking system usually gets tighter towards the end of the year and additional liquidity is needed to meet that demand.

Manglunia added that in order to carry over the inventory to the next financial year, there is a need for a bit more liquidity than usual.